Understanding the difference: claims made vs. occurrence coverage

By Gloria Forbes posted 06-22-2018 15:40


CSIA offers its members a unique insurance program that combines professional liability insurance coverage with general liability coverage in a single insurance policy. This combination presents a number of benefits to system integrators. One of those benefits is that it avoids an expensive coverage fight between two insurance companies over whether a claim should be covered under a professional liability policy or a general liability policy. One consequence of combining the two coverages into a single policy is that the policy has two different coverage bases, as the professional liability portion of the policy covers losses on a claims made basis and the general liability portion covers losses on an occurrence basis.

No matter whom you obtain insurance through, it is likely that general liability coverage will be on an occurrence basis while professional liability coverage will be on a claims made basis. This distinction between claims made coverage and occurrence coverage is common throughout the insurance world, but it can still cause understandable confusion. It can also create complications and gaps in coverage if companies fail to understand the distinction.

Put most simply, occurrence based policies cover losses based upon the date on which the event giving rise to the loss happened. Think of a car accident that occurs a few days before an automobile policy is set to renew. Any lawsuit that resulted from the accident would be covered by the automobile policy in effect at the time of the accident, rather than by the renewed policy.

In contrast, a claims made policy does not cover losses based on the policy in effect when any incident giving rise to a claim happened; these policies cover claims based on when the first demand for monetary damages is made to the covered company, although the exact specifics can vary based on the facts giving rise to the claim. This matters mostly in cases where it can take some time between the act of negligence giving rise to the claim and the discovery of the damages caused by it. A loss covered by a professional liability policy might occur two or three years before the policy’s effective date if the damage caused takes a while to discover.

Further complicating claims made policies is coverage for prior acts. This means that the policy will cover a claim made during the current term as look as the act that caused the claim was during the prior act period. This will often appear as a retroactive date. If the act was after the retroactive date and made during the policy term, the claims made policy provides coverage.

In most instances, the statute of limitations will act to protect companies and insurance carriers from claims that occurred a long time ago. The statute of limitations does not begin to run, however, until a company or individual knew or should have known about the injury giving rise to a lawsuit. This creates a potential for policies to cover claims that go back a decade or more in unique situations – a problem particularly aggravated in the medical malpractice field, where it can take twenty years for an incident of malpractice to be discovered. The nature of these types of losses mean professional liability policies can have a long tail, stretching back a long time and making them more risky for insurance carriers. It also means that companies need to consider purchasing tail policies for their coverage when closing up shop or as part of a merger or acquisition.